THE long queues at petrol stations on Monday night was a precursor of things to come. Motorists waited patiently for their turn to fill their petrol tanks just before the price of RON 95 and diesel jumped 20 sen a litre at midnight.
It was a scene played out a number of times over the years when petrol prices at the pump were increased as energy subsidies were cut.
This time around, the decision to trim the fuel subsidy was just part of a greater scheme.
It was the first salvo in the Government’s effort to bring down the fiscal deficit and eyes are now squarely on just what more needs to be done to whittle the deficit to 3% by 2015 and a balanced budget by 2020.
On the cards is the continued rationalisation of subsidies and the sequencing of big ticket projects to lessen the import bill that has squeezed the current account surplus in the second quarter.
Moody’s Investors Service, in its assessment of the move to hike the price of fuel, says it represents a credit positive step in the Government’s larger fiscal consolidation plan but it is waiting for details of which are to be unveiled in the October budget speech.
The cut in petrol subsidies will result in savings of RM1.1bil and RM3.3bil for 2014. Analysts are divided whether that will be enough for the Government to meet its deficit target of 4% this year as there are still large expenditure transfers. “We currently forecast the deficit at more than 4% of gross domestic product (GDP) and the lack of additional reforms would place the Government’s fiscal targets increasingly out of reach,” says Moody’s.
The need to maintain such transfers such as the 1Malaysia People’s Aid is to ease the burden on the low-income and vulnerable groups as subsidies get rationalised. The continuation of such expenditures also allows for targeted subsidies to low-income households.
The Government is also looking at a comprehensive social safety net and further fiscal measures would also be introduced. It is expected that more fiscal tightening measures will be introduced during the budget.
There was, however, a knee-jerk reaction to the cut in fuel subsidies. The ringgit bounced back from its slide against the US dollar but analysts say any sustainable climb will depend on what the market sees from further fiscal reform measures.
More than reducing subsidies
The timing of announcing the outline of its fiscal reform measures and the first cut in fuel subsidies was in response to worries by the rating agencies of the fiscal debt situation in Malaysia.
“Faced with the risk of a sovereign ratings downgrade and investors’ focus on the domestic and external sectors’ vulnerabilities at a time of a retrenchment of foreign capital, it is crucial that Malaysia fine tunes its macroeconomic policy mix for growth and financial stability over the medium term,” says CIMB Research chief economist Lee Heng Guie.
He feels that a fundamental review is also required to weed out the country’s non-developmental, low priority and unproductive expenditure, while focusing on growth-oriented spending.
“The problem of overlapping spending schemes has to be avoided. More cost-saving initiatives, including a critical review and reform of the procurement system to combat wastages and leakages must be implemented.
“A fiscal consolidation strategy should be accompanied by better fiscal and financial control over public-private partnerships and state-owned enterprises, aimed at putting the gross public debt-to-GDP ratio as well as contingent liabilities (loans guaranteed by the federal government) on a firm downward trajectory in the medium-term,” he says.
GST and RPGT
It is widely expected that a schedule for implementing a Goods and Services tax will be revealed when the budget is announced in October.
Citi research, in a note, thinks there is a high probability that GST implementation will be announced in the budget. “We doubt the Government will tempt the wrath of ratings agencies after raising hopes last week with such talk,” it said.
Reports have quoted Tan Sri Irwan Serigar Abdullah, the secretary general of the Finance Ministry, as saying that if the GST is announced during the upcoming budget for implementation in 2015, the rate will likely be between 4% and 4.5%.
For one, the GST itself will mean more taxes as the Government is expected to generate more revenue from its introduction. One economist also adds that a lot of businesses are also in favour of a GST because of the billions of ringgit it stands to gain from an imput tax rebate.
He says that analysis has shown expenditure will also rise because of GST and therefore, targeted social welfare programmes for the low-income earners will be needed once GST is implemented.
The other tax that will likely see a hike is the real property gains tax (RPGT). A higher RPGT, together with possibility higher stamp duty charges for higher priced properties, should increase government revenue. But one big motive behind hiking the RPGT, and possible raising the floor price on properties eligible for purchase by foreigners, is to cool down the property sector and stem the rapid rise in property prices.
Property prices are generally considered to be unaffordable for a growing segment of the population.
Impact on the economy
Fiscal reforms will mean cutting down expenditure and some economists are expecting economy to feel the impact from slower government expenses.
“We cut our 2013 GDP growth forecast to 4.4% from 5% earlier and 2014 estimate to 5% from 5.2% earlier – both of these numbers are now below the consensus expectations,” says Credit Suisse in a report.
“This downgrade reflects headwinds against private consumption from higher fuel prices and likely delays of some infrastructure projects hitting investment.” With the budget projected to be less expansionary, some are suggesting that the Government will look at ways to boost exports and drive investments as a means to compensate for slower spending.
“It is left to be seen if there will be a cut in corporate taxes and whether that will be enough to drive investments. As it stands, a lot of companies have a lot of cash in their balance sheet and it will have to be a big cut to get them to start putting that money to work,” says an economist.
“If that done, then there will be a big gap between corporate and personal income taxes.”
- Contributed by By JAGDEV SINGH SIDHU jagdev@thestar.com.my
It was a scene played out a number of times over the years when petrol prices at the pump were increased as energy subsidies were cut.
This time around, the decision to trim the fuel subsidy was just part of a greater scheme.
It was the first salvo in the Government’s effort to bring down the fiscal deficit and eyes are now squarely on just what more needs to be done to whittle the deficit to 3% by 2015 and a balanced budget by 2020.
On the cards is the continued rationalisation of subsidies and the sequencing of big ticket projects to lessen the import bill that has squeezed the current account surplus in the second quarter.
Moody’s Investors Service, in its assessment of the move to hike the price of fuel, says it represents a credit positive step in the Government’s larger fiscal consolidation plan but it is waiting for details of which are to be unveiled in the October budget speech.
The cut in petrol subsidies will result in savings of RM1.1bil and RM3.3bil for 2014. Analysts are divided whether that will be enough for the Government to meet its deficit target of 4% this year as there are still large expenditure transfers. “We currently forecast the deficit at more than 4% of gross domestic product (GDP) and the lack of additional reforms would place the Government’s fiscal targets increasingly out of reach,” says Moody’s.
The need to maintain such transfers such as the 1Malaysia People’s Aid is to ease the burden on the low-income and vulnerable groups as subsidies get rationalised. The continuation of such expenditures also allows for targeted subsidies to low-income households.
The Government is also looking at a comprehensive social safety net and further fiscal measures would also be introduced. It is expected that more fiscal tightening measures will be introduced during the budget.
There was, however, a knee-jerk reaction to the cut in fuel subsidies. The ringgit bounced back from its slide against the US dollar but analysts say any sustainable climb will depend on what the market sees from further fiscal reform measures.
More than reducing subsidies
The timing of announcing the outline of its fiscal reform measures and the first cut in fuel subsidies was in response to worries by the rating agencies of the fiscal debt situation in Malaysia.
“Faced with the risk of a sovereign ratings downgrade and investors’ focus on the domestic and external sectors’ vulnerabilities at a time of a retrenchment of foreign capital, it is crucial that Malaysia fine tunes its macroeconomic policy mix for growth and financial stability over the medium term,” says CIMB Research chief economist Lee Heng Guie.
He feels that a fundamental review is also required to weed out the country’s non-developmental, low priority and unproductive expenditure, while focusing on growth-oriented spending.
“The problem of overlapping spending schemes has to be avoided. More cost-saving initiatives, including a critical review and reform of the procurement system to combat wastages and leakages must be implemented.
“A fiscal consolidation strategy should be accompanied by better fiscal and financial control over public-private partnerships and state-owned enterprises, aimed at putting the gross public debt-to-GDP ratio as well as contingent liabilities (loans guaranteed by the federal government) on a firm downward trajectory in the medium-term,” he says.
GST and RPGT
It is widely expected that a schedule for implementing a Goods and Services tax will be revealed when the budget is announced in October.
Citi research, in a note, thinks there is a high probability that GST implementation will be announced in the budget. “We doubt the Government will tempt the wrath of ratings agencies after raising hopes last week with such talk,” it said.
Reports have quoted Tan Sri Irwan Serigar Abdullah, the secretary general of the Finance Ministry, as saying that if the GST is announced during the upcoming budget for implementation in 2015, the rate will likely be between 4% and 4.5%.
For one, the GST itself will mean more taxes as the Government is expected to generate more revenue from its introduction. One economist also adds that a lot of businesses are also in favour of a GST because of the billions of ringgit it stands to gain from an imput tax rebate.
He says that analysis has shown expenditure will also rise because of GST and therefore, targeted social welfare programmes for the low-income earners will be needed once GST is implemented.
The other tax that will likely see a hike is the real property gains tax (RPGT). A higher RPGT, together with possibility higher stamp duty charges for higher priced properties, should increase government revenue. But one big motive behind hiking the RPGT, and possible raising the floor price on properties eligible for purchase by foreigners, is to cool down the property sector and stem the rapid rise in property prices.
Property prices are generally considered to be unaffordable for a growing segment of the population.
Impact on the economy
Fiscal reforms will mean cutting down expenditure and some economists are expecting economy to feel the impact from slower government expenses.
“We cut our 2013 GDP growth forecast to 4.4% from 5% earlier and 2014 estimate to 5% from 5.2% earlier – both of these numbers are now below the consensus expectations,” says Credit Suisse in a report.
“This downgrade reflects headwinds against private consumption from higher fuel prices and likely delays of some infrastructure projects hitting investment.” With the budget projected to be less expansionary, some are suggesting that the Government will look at ways to boost exports and drive investments as a means to compensate for slower spending.
“It is left to be seen if there will be a cut in corporate taxes and whether that will be enough to drive investments. As it stands, a lot of companies have a lot of cash in their balance sheet and it will have to be a big cut to get them to start putting that money to work,” says an economist.
“If that done, then there will be a big gap between corporate and personal income taxes.”
- Contributed by By JAGDEV SINGH SIDHU jagdev@thestar.com.my
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